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I am looking for advise on the tax treatment of exercise of TARP equity warrants of a bank.

These were issued during the financial crisis have certain anti-dilution provision, wherein the strike price and number of shares per warrant adjust if the banks paid dividends above a threshold. The warrants expire in Oct 2018. The warrants trade on the market and I purchased them about 3 years ago.

The investor relations department of the bank said that the exercise has to be cashless. The exercise price will be paid for by selling some shares and I will receive the remaining shares plus cash in lieu of fractional shares. I expect this creates a taxable event, but not sure if it is ordinary income or STCG or LTCG.

Can someone explain how the tax calculation will be done using the following example?:

100 Warrant purchased 7/1/2015 for $1500 ($15/sh).
Adjusted strike price $32.
Stock price on exercise date $60.
Each warrant has a right to 1.01 shares (i.e. 100 warrants give a right to purchase 101 shares at an exercise price of $3200).

If I just sell the warrants, instead of exercising, I know I will owe LTCG. If the exercise creates ordinary income or STCG I may be better off selling the warrants than exercising them.

Thanks for your expertise and assistance.
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